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Can UPS' Global Domination Continue?

UPS is fundamentally strong, but faces challenges.

United Parcel Service(NYSE: UPS) is the world's largest package delivery company. Yet it's not invincible. The question before us today is: Can UPS overcome its weaknesses and emerge as the investor's company of choice? Let's put UPS under the scanner and identify its strengths, weaknesses, opportunities, and threats.

StrengthsCourier king: UPS operates on a massive scale, with more than 2,800 operating facilities all over the world. In 2011 the company generated revenue of $53 billion, 7.2% higher than the previous year.

Rapid inorganic growth: UPS has a penchant for acquisitions, which has helped the company expand its overseas presence and also added to its coffers. In a $6.8 billion deal, UPS recently acquired TNT Express, a Dutch package delivery company, to expand its presence in Europe and also consolidate its business in Brazil and China.

Thick margins: UPS is not just a revenue grabber; it is also efficient in converting its sales into profits. This is evidenced by the fact that unlike rival FedEx(NYSE: FDX), whose low net income margin stands at 4.8%, UPS boasts a net income margin of 7.2%.

WeaknessesHeavy debt load: Although UPS operates efficiently, the company is burdened with a heavy debt load. At the end of 2011, its debt-to-equity ratio stood at an alarming 157%. Even though the company earns 17 times its interest expenses and has sufficient funds to cover them, it should take steps to manage its debt situation.

Barometer of the economy: UPS is highly dependent on the nature of the economy, which means factors such as recession, unemployment, and steep fuel costs translate into hard times for UPS.

OpportunitiesLooking east: Emerging Asian nations, such as India and China, still have a considerably low penetration of package delivery services, making them the perfect regions for potential acquisitions by the company.

Online shopping: The recent boom in online shopping also means that an increasing number of people will require shipping services, which should translate into a potent source of revenue for companies like UPS. Online shopping giants Amazon and eBay regularly use its services to reach out to their customers.

ThreatsSpiraling fuel costs: UPS has to contend with rising fuel costs that hurt margins and pinch profitability. In 2011 the company's revenue grew by 7%, while fuel expenses surged by a staggering 36%.

China challenge: Although China is a highly lucrative area of expansion for most organizations, including UPS, the recent slowdown in China's economy continues to be a source of concern. UPS' actual performance may not live up to its expectations in that region, but this story has yet to play out.

The Foolish takeawayUPS has strong fundamentals, a broad market, and strategic acquisitions working in its favor. However, the company must not neglect its debt burden. I would keep an eye open for the company's quarterly results, which are expected to come out at the end of this month. Keep a close watch on the parcel carrier by adding it to your watchlist.